Insurance Companies & Debt Free Living

My husband and I have been debt free for seven years. Hooray! We cancelled all of our credit cards in 2001 and paid off our home mortgage in 2002.

A few weeks ago, our homeowners insurance premium went up substantially. I called our agent to ask why and he told me that our premium was automatically raised because our credit score was low.

I got worried and checked our credit report at annualcreditreport.com (as you suggested before) and found nothing at all on our credit report. So, I called our agent back and told him the story. He did some follow-up and found that because we didn’t have any outstanding credit of any kind on our credit report, they couldn’t verify that we were responsible payers, thus we were placed into a higher risk category.

This seems nonsensical! I am shopping around for new insurance but I wanted to know what you thought of this policy.

Obviously, on an individual level, this is nonsensical. A person with no debt at all and a long history of never having debt is the type of person that ought to be considered a great client for an insurance company. I can’t think of anything that screams “stable and reliable” than a person without any debt.

Yet, if you step back and look at the broader view of society, this policy does somewhat make sense.

First of all, the insurance company has to have standard rules and practices for setting their rates. They have to know cold the risks associated with different factors, from the color of the car to the reliability of the driver. When they know these risks, then they can calculate the exact rate to charge to simultaneously be competitive with other companies and earn a profit for themselves.

Hand in hand with that is a society that lives and thrives on personal debt. Between automobile loans, student loans, consumer loans, mortgages, and credit card debt, the vast majority of Americans possess some form of debt in their lives. Given that as a baseline, it’s reasonable to argue that a person who pays their debts in a timely fashion is more reliable – and thus less of a risk – than a person who does not.

That information is packaged up nicely in our credit reports and usually calculated down to a single number that represents how efficient we are at paying our debts – our credit score. Insurance companies will often take this score and run with it, using it as a basis for determining our premiums.

Unfortunately, a person’s credit score is higher if they have small, reasonable debts and always make their payments instead of having no debt at all.

The next question, obviously, is how can a debt-free person improve their credit score without getting into additional debt? There is no easy answer to that question.

The simplest solution is to simply use credit for the most routine of purchases – groceries, gas, and so forth – and to pay off that debt in full each and every month. One way to do this – to keep things under control – is to simply get a credit card at your preferred gas station, use that card just to fill up on gas and nothing else, and then pay off the card each month. So, for example, you might have a BP card, and you would only use that card at BP.

A second option would be to stop by your local credit union and talk to a loan officer. They may be able to develop some form of no-risk personal loan for you based on using some of the assets you have as collateral. You then just leave the money at the credit union in an account and have all payments for your loan deducted from that account. If you have such assets, the actual cost of this would be minimal.

Yes, society has stacked the deck a bit against people with no debt, as there are many financial incentives to carry debt. With a little clever thinking, though, such risks can be pushed back.

This has been one of my biggest pet peeves with Dave Ramsey. You have to have some history in your credit file to function in this world. Like it or not, that is just reality.

Your advice is spot on. I suggest getting two credit cards. Charge a tank of gas on each card each month and pay it off. Do that for a while and you should have a solid score in the mid 700’s. You won’t have a problem with insurance or utilities anymore.

Seems like the insurance company should have been able to work with her given that they’re long term customers. I once got an interest rate for an auto loan from my credit union that was not the best rate at the time because of a blemish on my credit report (long story & not actually my own fault). When I called, they were able to lower my rate to the best rate at the time because I was a long term customer of theirs & had a previous auto loan at that credit union that I had paid off early. Maybe she should try talking to a manager.

Taking a loan to increase your credit score is not a good idea according to me.
Why would someone pay (interest in this case) to get a good credit score.

My best option for people who are:
1. Debt free
2. Know how to live on their budget/means

Such people should get a rewards credit card. Use it for all the expenses.
As such people know how to live on their budget/means they will not overspend and make payments to the credit card on time.
Also in this process get good credit score and in bonus get some “moolah” in terms of rewards!

It does seem odd to me because homeowners insurance is usually pre-paid. You don’t pay for insurance after you have it. A bad credit score doesn’t make it more likely that something will happen to your house. Having a credit card to pay bills with seems like a good solution to keeping your credit rating up.

A good credit score is also important for certain fields of employment. I worked at a bank that ran a credit report on all prospective employees. The theory was that if you can’t manage your personal finances, you certainly should not be working in a finance related field.

I’m sympathetic to their situation (and jealous/inspired by the fact that they have no mortgage!! way to go!), but I am honestly a little surprised that this couple wouldn’t have known that having no credit cards or loans = no credit score. As soon as she said “canceled all credit cards,” I was thinking “uh oh”. I still have the first credit card I ever opened. Its rewards aren’t great but there is no yearly fee, and it adds 4 years on to my credit history that otherwise wouldn’t “exist” in the credit bureau’s eyes. I just charge the occasional $20 on it to keep it active, and it keeps my score high.

I agree with what you said – use credit for day to day purchases and just make sure you pay it back. No debt, PLUS you get to have a good credit score.

A low FICO score is considered a universal indicator of someone who has problems paying their bills promptly, this is extrapolated to assume recklessness in other areas of their live. Manual credit underwriting used to separate the credit-worthy from the credit-unworthy but automation is cheaper than staffing employees to check your financial records.

FICO automatically stacks the deck against those living a frugal and debt-free life, it’s a shame we have to play by rules that rewards carrying multiple types of debt. This is an unfortunately fact of modern life because we are judged in so many ways by our FICO score. My advice is to get a credit card with a cash back reward program, might as well earn some money for playing the FICO score game.

I agree that this is a silly situation to be in, and I hope that Mary is able to work out a solution with her insurance company for a better rate. I thought I would mention one additional part of the “credit score” equation. In part, your credit score is based on how much available credit you have access to. For example, if you have a credit card with a $10,000 limit, and you have a $0 balance or you pay off 100% of the purchases on that card every month, you essentially have $10,000 worth of credit available to you, which works in your favor.

In other words, it might be a benefit to you to apply for a credit card, but never use it, rather than not having a credit card at all. Then your credit score will reflect the fact that you have $xx amount of credit available, and you’ve never missed a payment. That will help to increase your credit score over time.

“I can’t think of anything that screams “stable and reliable” than a person without any debt.”

How about a person who has no debt *and has available credit*?

If I were a home insurer, I’d see such a person and think, “This person obviously has a certain amount of financial self control to have lines of credit available and not max them out. She probably is living well within her means and probably isn’t spending every penny in her bank accounts. If some unexpected expense comes along, it’s probably not going to throw her into a financial tailspin where she can’t pay her other bills – at the very least, she’ll be able to use her available credit as a cushion until she gets back on her feet.”

I’d see a person with no credit cards at all and think, “There’s a decent chance that this person can’t trust herself with credit cards because she’s afraid she’ll max them out. If that’s the case, she’s probably living paycheck to paycheck already, she almost certainly isn’t saving for routine home maintenance expenses, and even a small emergency could leave her without money to pay her bills, including mine.”

I don’t know if the statistics bear me out here, but I always thought that this was why your credit score takes into account your available credit.

I’m not in a debt-free lifestyle by any means, but I do pay my balances in full every month. Yet, I’ve been denied credit card applications because I have too few revolving accounts. In other words, credit companies seem to think I need revolving accounts to request one, but they deny me such under the same illogic as Mary’s dillemna.

Sounds like they’ve got a faulty algorithm for current customers– they should be looking at changes in credit history for current customers. I hope they can work it out.

We know someone who can’t get a job because of her bad credit. Entry-level jobs with minimal education requirements all seem to pull up credit reports these days. At least no credit is better than bad credit.

It probably wasn’t a faulty algorithm. They paid their mortgage off in 2002, 7 years later it will fall off their credit reports, bringing them to 2009. Their credit scare probably took a nosedive when there was nothing left on it.

I don’t think it’s at all reasonable to assume that a person without credit cards is living paycheck to paycheck. If FICO score weren’t an issue, a financially responsible person would have ZERO need to have available credit. Having open credit lines that you don’t need leaves you susceptible to fraud. If you didn’t know that there were reasons unrelated to credit (such as insurance) to keep your FICO score high, why would you keep the credit lines open?

Matt, it may have seemed off topic but Trent does have a point. In order to get a discount on my homeowners policy, I have to have my auto insurance through the same carrier. My insurance company looks at the color of my car and how many doors it has to determine how much my auto insurance is. If it is red, my rate is higher than if it was white. If it has two doors, my rate is higher than if it had 4 doors. They also use this info to determine whether or not I am a responsible adult and use it as one factor in setting my home owners insurance premiums. Two doors and red might mean single and wild, parties and irresponsibility while white and 4 doors means family and responsiblity . Dosen’t make alot of sence but not much does these days.

“That information is packaged up nicely in our credit reports and usually calculated down to a single number that represents how efficient we are at paying our debts – our credit score.”

Ehhhh, that’s a little misleading. That number is not designed to report “how efficient you are at paying your debts.” There is no clear definition of the number, that’s part of the problem. It’s a proprietary algorithm that can run your life, owned by a corporation.

If it was solely based on how you pay your bills, fine… but it has other factors – for instance, mix of accounts – real estate, installment, revolving – if it was only calculating how efficient you are at paying debt, then the highest scores would go to those who pay it off the most, the quickest, and thus need less of it, which is not the case at all.

The number could probably be more accurately described as a calculation of how you CARRY debt. A lot? Bad. A little? Good. On time? Good. Missed a payment? Bad. Different types? Good. No home? Bad. Too many accounts? Bad. Too few? Bad.

Carrying NONE would give them nothing to calculate, and thus not enough data to score you. Which is the case in point.

Even the credit card scenario is only efficient in one area, and you fail the “mix” part of the scoring model. Will it be enough though? Maybe. Maybe not.

Overall the topic of the post is off… this is not a problem with FICO scores or this individual’s frugality. It’s how expanded the use of these scoring models has become. Insurance is now the big player – home, car, etc. – all take your financial picture into play to determine your risk – right or wrong. As she shops for insurance, she will probably get some surprises if she’s looking to move car insurance as well.

You may see much more expanded use of this in employment, even for more basic jobs, as well as the medical field… who’s ready to be told their doctor will no longer see them because their MEDFICO is too low? It’ll keep coming, unless it is put under control.

Mary, congrats on living on a debt free lifestyle! No doubt the nominal smart-tax you’re paying to the insurance company will pale in comparison to the nest egg you’re building with no payments. This unfortunate circumstance is not easily avoided living debt free.

I encourage you to put some pressure on your insurance company and don’t let anyone talk you into signing up for credit just to save a few bucks on insurance. You’re living the dream Mary! Way to go!

Ouch. That is infuriating! As a long term customer, there is no reason that their algorithm should have done this to Mary. Also, it seems dumb that FICO doesn’t figure in the reason for your lack of recent history… never had credit, all your accounts were charged off or all of them were closed and paid as agreed….

I had this problem even at age 24 after graduating from law school. I had a full college scholarship, so no student loans, and my parents covered my car and living expenses while I was in school, so no auto loan or credit cards.

Obviously it’s a nice problem to have, but I was embarrassed to have to put down a deposit for my cell phone contract when I was out of school and starting a job with a 6-figure salary.

This doesnt have anything to do with the fact that they have no debt. They also have no available credit. A big part of a credit score is debt-to-credit ratio. So if you have no debt and $5000 available credit, your score is higher than if you have $5000 debt and $7500 credit limit, because you only have $2500 available credit.

This is great information. I had assumed, like Mary, that because we have no home mortgage, car loan, or outstanding debt, we didn’t have to worry about the credit schore. Thanks for the new information. Don’t think it is quite right, but then again, that doesn’t get me far, either.

FICO has no interest in tweaking their formulas to reflect the fact that not everyone is in debt. They have every interest in PROMOTING debt in any way possible. That way, people remain captive to their marketing pitches.

We live in a state where you can’t use credit for home insurance but can for auto insurance. They offer appeals if you can show that you have bad credit due to bankruptcy, medical issues, job loss, etc. See if your insurance has one of these appeals. And shop around.

Trent, this is my first post. Thanks for providing such a great site, and thanks to all your readers who provide thoughtful comments.

“One way to do this – to keep things under control – is to simply get a credit card at your preferred gas station”

It might be better to get a major CC (MC, Visa) from a credit union vs a gas station or dept store card because applying for a new CC dings your score (slightly), but applying for a dept store or small shop CC dings it more. A major CC is seen as a ‘better’ source of credit by the FICO folks, perhaps because it is more difficult to get(?). Plus, you can use it in more places. Still, continue to pay it off as you are doing, though.

Insurance companies will come up with any spiel to raise a bill every year and limit payouts on policies. They either will raise the amount of coverage which is absolutely crazy in a deflationary housing market or they will come up with a lame excuse about a lowered credit score to a customer who happens to be a responsible bill payer.

Like you my rates went up for the same reason because I shunned the use of credit over the past 3 years. My rates got so high the payments were equivalent to assuming a total disaster within 30 years. I decided to drop the coverage.

No one’s mentioned Dave Ramsey’s answer to this? He gets this question all the time, given that this is exactly the goal of his plan, and he himself says he has nothing in a credit report. (I hear the show a lot, but haven’t felt the need to give up all credit cards.)
He says forget FICO and take your business to a place that does manual underwriting. At least here there is a big agency that does this. Since the businesses that get a recommendation from him have to follow certain guidelines, I bet if you looked for an insurance agent on his website, they would know exactly what was going on here.

FICO is obviously an important number to many companies. I’ve had my score pulled for utilities, work, phone companies, banking, loans, etc. Everyone will run into this problem at one time or another, its a fact of American life. The easiest solution is to simply get a no-fee credit card, even if you only use it ONCE, just having the avalibility of credit will raise your score, the longer you have a single credit card the better. If you can’t handle a credit card than open an account than immediatly shred the card so you CAN’T use it. You never know when or for what you might need a high credit score and its better to be prepared than for a hike in rates to happen unexpectedly.

It isn’t fair or an accurate reflection of your true credit-worthiness, but our credit score does matter. However, my father is retired, has everything paid for, has plenty of money in the bank, a state pension and is still working. In other words he doesn’t have many financial concerns. He doesn’t care about his credit report and he’s told me that numerous times. But he’s 65.

My 40 year old sister has horrible credit. However she owns two homes and a farm (outright), over 20 horses, a car, a truck, several horse trailers (all paid for) and has over $100k in the bank. Her monthly expenditures come to less than $1000/mo (she gives new meaning to the word frugal). So why is her credit a mess? She has no mortgage payments, car payments, or loan repayments. She’s never had a credit card. She frequently forgets to pay her bills on time. We looked at her credit score once and it was in the 500s. She says she could care less what her credit score is, but at 40 I’d be concerned if I had that score. It is possible she may need a loan one day.

Contrast this with my husband and I. We have perfect credit (both over 800). But we have a mortgage that would make your toes curl (but its less than 25% of our take home pay). We use our credit cards and pay them on time (usually pay them off each month). We pay all our bills on time and thus have perfect credit. But if you laid out my sisters and my finances together I think we’d all agree she’s the better credit risk due to her lack of debt. But if you look at our scores I’d be the better bet.

For those who think it’s a good idea for a debt free person to open a credit card and use it a little or not at all and shred it, you need to realize the risks you are taking. Your credit card number can be stolen and used, you are more open to identity theft, and also, there’s access(if you’re tempted) to actually buy things you wouldn’t pay for outright with cash. If a person opens an account and shreds the cards, they are not likely to open statements and read them. What if the card is being used without their permission and they don’t realize it? That’s a great plan for your finances.(sarcasm) I agree with CDG above. Search a GOOD company who uses their brain and ethics. Don’t send your money to a company who can’t think for themselves when it is obvious who is financially stable.

myFico.com has a great credit score simulator. I was playing with it for a post some time ago and found that we are actually hurting out credit score by paying off our cc every month in full before they close their books.

Unfortunately all insurance companies work the same so Mary may have no choice but to play the game.

The key to the problem is in Mary’s first sentence – she and her husband paid of their credit card debt and canceled their credit cards.

Unfortunate as it is, the common wisdom is if your are going to cancel credit cards, keep one – the one you’ve had the longest as this will help establish your rating. If you cancel and keep a credit card that’s too new you will be seen as being new to credit and not yet established a solid record of payment…

Sad situation. But if they had kept just one card and put it away, periodically buying something and paying it off right away, there’d be no problem.

I am a Mortgage Loan Officer and Credit Score is King. I advise people in this situation:

1. Get a Credit Card from your Credit Union and have them secure it with your savings since you don’t have established credit. Use it to make a couple of purchases a month and ALWAYS payoff monthly so you don’t pay interest. There must be some activity to generate a score.

2. Can a parent or close relative add you on as an Authorized User on their Credit card. You only want to do this if you are sure they have very good credit with a high limit, low balance card. Their credit will then automatically report to your credit report but you are not liable for the card.

Tell the insurer that you are capable of paying the bill, in full, at the lower original rate. But the higher rate means you will move your business elsewhere. After all, if you’re gonna pay a higher premium, you might as well pay it to their competitor.

And then do it. Talk the supervisor, explain that you are moving to a competitor because that competitor actually wants your business. And then talk to that person’s supervisor and say the same thing. Work with the new insurer, sending a nicely worded letter to the them (CCing the old insurer), explaining that it is nice to work with a company that actually appreciates their customers.

My own experience is this: “I can afford to buy a brand new car, outright, without haggling on the price, and still have enough money left over to splurge on a dinner at Ruth’s Chris Steak House. Now, if you don’t put my rate back to where it was before your little algorithm took a flop, I’m gonna take my homeowners, car, and life insurance to someone else.” Surprisingly, insurance companies do respond to the sudden loss of a couple thousand dollars per year. And if they don’t, there are plenty of other insurance companies who will be happy to serve you.

There is not way I’m gonna pay to play the insane game of FICO with anyone.

Why is home insurance a function of credit history/score in the first place? It is not like the insurance company is giving them a loan or something. If they did not pay their insurance premium on time, can’t the insurance company just suspend coverage?
Either I am missing something very obvious here, or this is one of those “that is just the way it is” things.

The choice is not between no debt and an occasional big expense on one hand and debt on the other – that statement presumes having a credit card is equivalent to having debt. Go to a credit union, find a no-fee card with a low rate and a cashback reward program, and use it to literally make money in two ways – by taking the free money the card will give you for making the purchases you make anyway, and by *not* being overcharged for things like insurance.

Use your head and show some initiative. Tell your insurance agent to reduce your premium back to where it was or you will find a new insurance company. You are an existing customer. Did you ever fail to pay your premium? If not, you are being manipulated into a “high risk” category when there is no basis for that other than an attempt to extract more money from you. Do not fall for it.

Along the lines of getting a credit card and just using it for routine purchases, I would suggest that if you’re already able to pay off cards in full every month, why not apply for a card with rewards (such as Discover’s 5% cashback card) and make money on those purchases? It’s a small amount but it could really add up after awhile if you’re using it for monthly or weekly items like gas and paying it back in full every month.

My credit history is lousy and wrecked to hell. I had to get the water, gas, phone and electric in my name a couple years ago due to someone in the household owing these people. They didn’t care what I owed to who, as long as I didn’t owe them. And I didn’t, so they requested the same deposit they would ask of anyone else (flat fee for water, average monthly bill at the address for gas and electric, and then I didn’t even have to pay install on the phone since we were on the Welfare). The damn gas company called the landlord and found out that person was living there too, and demanded their social, but luckily he was a sr. and we used the jr.’s number, so they didn’t notice there was a history there and we avoided that problem.
I knew a family that went through the Dad’s, the Mom’s, the first son’s, the daughter’s, second son’s, second daughter’s and finally the grandson’s SS# getting the electric turned back on at the same address. I’m surprised the electric company let it go that far, and kept doing it. They damaged the credit report of at least six people just trying to keep the lights on. I wonder how far it went?

Mrs Mule had no credit history, being an immigrant. So, we applied to a local bank for a credit card in her name to get things rolling. They required me to cosign. She has the payment ready within *minutes* of receiving the monthly statement!

Would it be possible to just get a creditline on a bankaccount? I have one of 2500 EUR on my main account. It doesn’t cost me anything, as long as I don’t use it. Would that count as having a line of credit?

If you’re not risk-averse, talk to financial planner about debt-leveraged investing. Note: not for the faint-hearted.

Probably not. I was given $500 overdraft protection that I didn’t ask for. It allowed me to draw cash up to $500 out of their ATM when I only had ten cents in the bank. And that was with my wrecked credit. Wound up taking the cash advance and heading to the casino. Unfortunately for them, I just got charged a flat overdraft fee and they couldn’t nail any interest on me. I switched banks after that.

Installment credit including personal loans, car loans, etc. do not have much of an impact on FICO unless they increase the “mix of credit.” The reason for this is that FICO is not a score intended to help banks know how much money they might make from someone, but rather how likely they are to lose money when someone defaults. The theory is that if someone is more likely to default on their debt (low FICO) then they are more likely to make fraudulent or frequent claims against their homeowners insurance.

Hence, they will need credit cards and age. The best thing to do if they want to increase their credit score would be to apply for 4-5 credit cards each and build up the credit limits while paying off the balance each month. It will likely take at least 5 years to build a history strong enough to get into the lowest risk category for insurance.

Speaking to the narrow subject of your homeowners insurance, Mary…as a Cerified Insurance Counselor in PA I would suggest that you seek out a smaller local “Mutual” company…they typically do not factor your credit score into your rate as most major insurers do. Just make sure that they are rated A or better by A.M. Best

That really chops my stick! Do some homework and see if someone else will insure you for less. I did this with car insurance and ended paying $2000+/year less by doing some comparison shoppin because when my current insurance said they were hiking up the price due to my daughter not-her-fault accident.

A poor credit report also affects how potential employers look at job applicants. Not having a credit card costs you higher insurance premiums and may keep you from getting a job. A person can either moan and groan about “the system” or get a credit card, pay the balance in full online twice a month, and have a great credit score. I’m a broken record about this, but get an airline credit card. The free points are almost enough for a free domestic round trip. Arrange to have your power bills, and if you have a cable bill, the cable, paid automatically from the credit card. Saves you 88 cents a month for stamps, saves envelopes, and you never “forget” to pay these bills. Go online twice a month, pay off the amounts, and you’re done: perfect credit, better hiring potential, and a free flight. After 11 months, when the airlines wants you to charge you for the next year’s card, get a card with another airline first, then cancel the card. Voila! Another free flight, no credit card fee, perfect credit and good job hiring prospects.

These folks are not taking full advantage of their fortunate situation. I use credit cards for everything, pay them off every month and happily collect the rewards. I choose a credit card solely on the basis of how big a reward it offers.

Hang on – a potential employer in the US can and possibly will check your credit rating??? Wow. As far as I’m concerned, if I turn up every day and do (at least) what is required, what I do with the money I earn is my business. If that is having lots of debt or none, that’s my business.

They can, and usually will due to “fraudulent activity” reasons. They are “worried” you might take a bribe, sell company secrets, or something else due to money issues.

You can say no, but you usually lose your shot at a job as well.

@everyone else

There’s nothing wrong with the FICO system. It’s spelled out all over the net how your score is calculated. Your bad stuff goes away after 7 years, so your good stuff will as well. Simple as that. If you’ve canceled your cards and paid off your mortgage 8 years ago, you’re pretty much in the shoes of a teenager who has zero credit info.

@ sayjack – Barring someone who is fantastically wealthy, I don’t think anyone should ever consider self-insuring a home? One of the things insurance is supposed to protect you against is total loss…I actually just got a “quick quote” for a potential new home yesterday – $2700/year for a $400,000 house. Over 30 years and adjusting 3% for inflation each year, the total premiums would still be less than half of the purchase price of the house.

@ Mel – Employers absolutely check your credit report. From their perspective, if you have bad credit and work with money, you may be more tempted to steal. If you have bad credit and work with sensitive information (classified, corporate trade secrets, etc) you may be more susceptible to being bribed. Employers don’t need to take that risk if they have equally qualified candidates, and one has better credit.

@ #38 deRuiter
Canceling credit cards also lowers your credit score so becareful with this one, you are better off to keep at least one credit card for as long as possible. The longer you have one single credit source, the better.

I have a credit card with an automatic billing each month, rental viola,$23.00. I pay it off each month online. I don’t carry the card with me so no temptation there. You don’t have to charge a lot of money, just pay on time. And yes it sucks that your credit score is fair game for anyone to deny you anything. But luckily it is possible to play the system to your advantage.

I haven’t ran into this problem, yet, but I still have a good FICO score. Once I become completely debt free and my score disappears as it did for Mary my plan is to simply refuse to do business with anyone who makes their decisions based on the score. As consumers we have to use our purchasing power to let business know what is and is not acceptable.

One of the Tea Party groups is proposing a constitutional amendment prohibiting mandatory health insurance. Find your local group and demand that this be extended to all forms of insurance.
When insurance is returned to a free enterprise status and has to compete for the purchase dollar of the consumer, prices should drop and the underwriting process will improve.
My credit, too, is shot all to h***, but I never made a claim on my homeowners’ or fire and EC policies over many years of coverage on substandard properties, and routinely carried a high deductible. See if you can get written confirmation of claims-free status from previous insurers, and try increasing the deductible to lower costs.

Like others, I’d recommend that Mary go to her agent and explain why her FICO is low, point out that her track record is an existing customer should indicate her ability to pay bills, have tell the agent that if they won’t lower her premiums back to where they were, she’ll leave. She could also ask if the company could manually underwrite her policy… they must have *one* underwriter left.

I have two credit cards, one for personal, one for business, I choose them for cash back rewards programs, pay the balance off in full each month, use the rewards at the end of the year to pay for Christmas presents

Works for me

By the way, I own my own business and one of the things I do is sell health insurance occasionally. I contracted with a new company recently to sell their products and they checked my credit report, can you believe it?

Getting a contract with an insurance company to sell their product and they pulled a credit report on me! Amazing…

This stuff is likely to get much worse as time passes and FWIW I think not having a FICO score is a bad bad idea

Wow – credit checking has really been upped since I worked at a Savings and Loan (24 years ago). We checked credit mainly to see your credit history – did you pay on time or not. Since all our income was from your loan payments, that was important. If you were debt free and no score, we had to dig deeper (easy in a small town). The fact that your loans were paid up when you came in did not indicate whether you had made monthly payments responsibly or whether Dad had given you the money.

Right now I am almost 73, debt free, and I have a lock down on my credit reports (2 hijacks in the last 2 years (with cc in my possession). I do have 2 cc’s that I use for everything I can think of what I need and pay them off online each month.

I do remember that in the late 80’s and early 90’s I was deeply in cc debt ($34k), but I always got the best rates because of the above thinking where I had previously worked. I made my payments on time each month, even if I had to borrow from Peter to pay Paul. The result was that I always got the best rate offers by the dozen. Once I was reading that if your interest was at 14.9% you were ahead of the game. At that time my interest was all at 9.9% until paid off. Later I got a rate of 4.9% until paid off and put all my debt on that. The last 3 years I used the 0% (different companies each year.)

@ littlepitcher: You’d like auto insurance to become optional? If you are severely injured in a collision by someone who has no liability insurance and no savings, who is going to pay your $1000s of bills for surgery and medical care?

As some others said, why get a loan just for the sake of FICO (that’s the kind of thinking that has allowed FICO to manhandle the marketplace). Simply go back to the insurance company and tell them you will shop your policy elsewhere unless they come back down. There is NO valid reason to get a revolving credit account or a loan simply to “improve your credit score”. Just pay your bills on time and force vendors to look at something besides the FICO score.

My wife and I have been without CCs or loans excpet for a mortgage since 2007. I jan 2009 we secured a home loan at THE best rates on the market.

“You’d like auto insurance to become optional? If you are severely injured in a collision by someone who has no liability insurance and no savings, who is going to pay your $1000s of bills for surgery and medical care?”

Just FYI, this is what the uninsured/underinsured motorist coverage in your auto insurance is for.

To me, there is a distinction between living a “debt free” lifestyle and living a “credit free” lifestyle. These people are not having difficulties because they have chosen to live debt free. They are having difficulties because they chose to live credit free. If they want to play the game with the insurance company and maintain a good FICO score, then they should obtain a form of credit (line of credit, Heloc, credit card, etc.) but remain debt free (and therefore true to their lifestyle commitment, which is awesome) by never carrying a balance on it. If they don’t want to play the FICO game, or if they question their ability to be responsible with credit, then they need to be prepared to get tough with their existing insurer or take their business to a place that offers reasonable rates for those who are living a credit free lifestyle.

Having credit and using credit are two different things. Mary’s house has no mortgage. Her bank or credit union would probably be happy to provide her a HELOC (home equity line of credit) of up to 20-40% of the home’s value for no points and no fees. She need never use it, but on her credit report it would show large available credit and very low usage – just what FICO scores highly.

There’s also an interactive program on one of the credit agency websites (maybe CreditSecure? – don’t remember) where you can enter various debt and credit scenarios and see what effect they would have on your credit score. Really nifty, and very surprising.

In using on credit scores, insurance companies are not mostly concerned with getting their premiums paid. They are relying on credit scores to make a statistical analysis of likely future claims experience. And if you have little or no credit history, then there is little or no information on which they can rely. Think of hiring an employee whose resume is simply blank. You’d be taking a major risk.

Apparently, having poor credit coorelates very well with higher claims. Just like age and gender do. Just like geographical location and commuting distances do. Just like past claims history does. The best and most careful driver in the world may be a 20-year old male living in Detroit, but on average that group (20-year old males living in Detroit) may be the worst, and the company has to price its premiums on the average expected claims experience of the group.

The more correlative data points the insurance company can use, the better it can analyze things, so if that 20-year old male driver from Detroit has an 800 FICO score that fact may offset some of the other demographic dings when he goes to get insurance. It might even offset them completely – maybe “on average” 20-year old male drivers from Detroit with 800 FICO scores (if there are enough of them to be statistically significant) make NO claims.

A good statistical analysis of group behavior is always going to be accurate “on average” but wrong as to many individuals in the group. To the insurance company, this is irrelevant because what they need to know is the average.

I don’t blame insurance companies for doing this because if they don’t or if they screw it up, they won’t have enough money to pay my claim if I ever need to make one. I also don’t blame them for trying to make a profit. If they don’t succeed, they’ll go belly-up, and – again – won’t have the money to pay my claims. Besides, carrying a load of resentment at the workings of reality is not healthy.

Hi – I too live completely debt free, but I simply make purchses like groceries, gas, etc. on a credit card & pay it off monthly. I get points, have an excellent credit score & I agree with the person who says even employers check on credit scores. We have to deal with the here & now, not what “ought to be” – insurance companies make assumptions based on previous behavior. If they can’t track your spending pattern, they must make assumptions based on the “worst case scenario” – they insure risk after all! Who can realistically blame them? CS

Well, Anne it is not identity theft when we had permission and they benefited from the arrangement. Now what the other household did, going through all their kids like sure is, a one-year-old can’t consent. But I guess they could’ve sit there without heat.

@ Troy and others… I agree so much. SO WHAT! Just search around for another carrier that does manual underwriting or pay the higher premium. Nothing is worth going back into debt, that’s plain silly. Normal, but still silly. I don’t want to be normal when it comes to debt.

@ Trent – I am somewhat shocked that you recommend credit after all your research, personal interviews and financial experiences. I love following your blog and will continue to do so, but I do see you leaning a bit more towards recommending riskier ideas and I really hope to see your recommendations return to things like having larger cash reserves, not using credit, etc. even when that type of advice goes against the voice of the masses.

I’m in the same boat and would recommend finding a manual underwriting insurance company.

I also own my home and car, hadn’t used credit of any kind in nearly 10 years, have significant savings and investments and still saw my insurance increase based on my “low” credit score.

Stupidly, I followed friends’ advice to apply for a credit card for small regular purchases and pay it in full every month, remain debt free and create a more recent credit history.

Well, can you imagine how many credit card companies wanted to offer me an account? That’s right – none. And in my naivete, I applied for 3 others in a search for one that would accept me, and by the time I got the rejections from the final 2 cards, their reasons for rejection now included “too many credit inquiries in past year” from all my recent applications.

I then asked advice from more savvy financial advisers and they introduced me to manual underwriting and insurance companies who would be willing to work with me and actually LOOK at my finances.

A friend told me 40 years ago that having no credit rating (I had not yet borrowed or charged anything) meant having a bad credit rating. He said to go to my bank (I did have a checking account), take out a loan for $100 and put the money in a savings account. Then pay off the loan in 5 monthly installments. Then I would have a very good credit rating. Simple, but it makes the point.

I’m from Australia and have never heard of our credit reports being accessed for things like insurance, employment etc. It’s occasionally checked for some utilities like telephone etc where you’re being billed in arrears, but for the most part, it’s just loans and credit cards.

The whole situation being descibed in America in this post and comments sounds horrible.

I personally think having no credit card is not fiscally responsible. Apparently these people never travel more than a few miles from their home. I sure would hate having my car break down without one. Do they have a debit card? Otherwise, you would be out of luck until your bank could electronically transfer the money, that frequently takes until the next day.
I too, would think someone without a credit card is too irresponsible to handle one correctly (paying off the balance each month). Sure there are exceptions to all the rules companies have, but how are they supposed to know, they don’t know you personally. They have to use some sort of criteria.

If you live in a high hazard state, ‘just get another insurance company’ isn’t that simple. We’re in Florida, the number of insurance companies who have pulled out of the state, gone out of business, or tripled their rates since the storms of 2004 is staggering. If someone told us we should get another credit card in order to adjust our credit score and keep our homeowner’s insurance under $2K a year, I would do it in a heartbeat because I know too many people who are looking at $4-$5K per year for an ordinary house in a not particularly surge-prone mainland location.

On the subject of making all insurance voluntary, the only insurance the government makes mandatory is a minor amount of liability coverage for your car. Yes, your uninsured motorist coverage will cover you if someone without insurance hits you, but do you really want your insurance to take the hit, and raise your rates, when it’s someone else’s fault? How would THAT lower rates?

Home insurance is usually mandated by a mortgage company. If you don’t have a mortgage, you aren’t required to have insurance, but it’s a good idea. Does anyone, especially you littlepitcher, think it would be a good idea to prevent lenders from requiring insurance, and then if the house burns down the lender can choose between writing off hundreds of thousands in debt, or trying to collect said debt from a now homeless family?

I knew a family that went through the Dad’s, the Mom’s, the first son’s, the daughter’s, second son’s, second daughter’s and finally the grandson’s SS# getting the electric turned back on at the same address. I’m surprised the electric company let it go that far, and kept doing it. They damaged the credit report of at least six people just trying to keep the lights on.This is pretty scary.

It is definitely a good idea to live a debt-free and credit card free life. I strongly support the views expressed by the author of the article. The person who has paid out all his outstanding debts and credit card balances punctually, and without hesitation, and if he is managing his monthly budget with whatever monthly income and without any use of credit card, must be rated with high creditworthy person,this is my opinion. It is definitely a bad idea to treat such person to be less creditworthy.

To have no credit card at all strikes me as extremely risky. If you want to rent a car, you are often just plain out of luck. If you are under 25, many rental companies simply will NOT rent to you with a debt card. If you are allowed to use a debit card, they will hold back on your bank account something very close to the full price of the rental, which can cause real problems when you want to pay other bills and $500 is not available. And it may take up to two weeks for the hold to be released!

If there is a family emergency and you need to fly somewhere in a hurry, without a credit card you are going to have real problems. Many debit cards have daily limits, and you may well not have enough to pay for the ticket. Furthermore, if your airline goes bankrupt and you bought your tickets with a debit card, you are out of luck. If you bought it with a credit card, you would get your money back.

If you do manage to fly out and then try to rent a car on your debit card, well, good luck with that! You are gambling that you can even find a place that will rent you a car, and I hope you have a whole lot of money in the bank account.

I feel a whole lot better knowing that I can fly to the bedside of a dying family member and get to say “goodbye.”

Someone may have already mentioned this, but I have been told that the credit gas cards do not factor into your credit score at all. I think a better plan may be to take out a small loan from your credit union and use that same money to pay it back. That way you are not using credit cards to buy everyday things – which can be dangerous for someone who has a harder time being thrifty.

I’m 63 and have been around the block a few times. I’ve been in debt and been out of debt. Being out of debt is better. As my credit card limits are north of $50,000 and the equity on my home is north of 80%, I think I have enough borrowing capacity.

I watch my credit reports and scores. The last time I checked the only reason I wasn’t over 800 was I wasn’t using my cards enough. I did the same thing Trent advises here.

I checked again six months later, and the only thing holding my score below 800 was I don’t have enough credit available to me. As my credit card limits are about 3 times my income and the equity on my home is north of 80%, I think I have enough borrowing capacity.

Didn’t the financial services industry learn anything about being overextended?

I’m not complaining about my scores hovering around 800. However, since I think I am just about perfect as a credit risk, I wondered why my scores weren’t perfect.

My takeaways:
1. maintain some credit availability
2. keep your balances at or near zero balances
3. use the cards at least a little
4. your score being close to 800 is good enough 5. monitor credit reports and scores regularly.

@Henry #56. You are right. It’s not identity theft if you have the person’s consent to use his/her identity.

It’s fraud against the person/company to whom you knowingly give the false information in order to obtain goods or services under false pretenses. Fraud by you and fraud by the person who allowed his/her ID to be used for that purpose. Still a crime. Depending on the amount involved and the method of transmission, it could be a felony, it could be a misdemeanor, and it could also be the federal offense of mail fraud.

At some banks, they offer a line of credit that you build. Same thing as taking a loan, but instead of paying after the loan you are strapped into paying into the loan before hand (you have to sign a contract that you will pay a certain amount each month). I cant remember what this is called, but it is usually in the form on a credit card that you are adding money into. Its a backwards loan, that builds your credit and then you have the money back when you are done. This is a great way to build credit without having to pay money towards anything you don’t want.

Books worth budgeting for

My new book, The Simple Dollar: How One Man Wiped Out His Debts and Achieved the Life of His Dreams, is available in bookstores now. Check out some of the life-changing experiences the book has given readers!

Check out my book, 365 Ways to Live Cheap, available in bookstores everywhere! It's filled with 365 great tactics you can apply to your personal finances, from frugal tips to great ideas for managing your money.